You’ve probably heard about annuities before—but have you ever considered adding them to your overall investment strategy? They remain often ignored and frequently neglected among investors, but you ignore annuities at your own peril: They’re certainly not the right product for everyone, but they do offer some benefits that are worth serious reflection.
What Every Investor Should Know About Annuities
So what are the things you need to know about annuities? Start with five basics.
1.What is an annuity? Basically, an annuity is a financial product—generally sold by insurance companies—that allows the investor to put some money aside and have it increase each year, without tax consequences. A stream of payments is triggered at a pre-specified time. A good way to think about annuities is as life insurance, except you actually receive the income in life, not upon death.
2.The big selling point of annuities is that they provide an income stream. For some investors, annuities can offer ongoing income that would otherwise be unattainable. You pay premiums for years, and then, at a set time, you start receiving those payments; ideally, the payments amount to more than what you have been paying, as the money has grown in value over time. It does not always work out like this, of course, but this is how annuities are pitched and marketed: As an income solution, perhaps for those who hit retirement age.
3.How do insurers make money on annuities, you ask? There are several ways. Annuity fees and management services are often leveled; if your investment performs better than expected, the insurer can keep anything that is in addition to the amount promised you; and of course, if you die, whatever is “leftover” goes to the insurer, generally speaking. Before buying any annuity product, it is imperative to talk with the insurer and make sure you know how the insurer is getting paid.
4.There are two basic kinds of annuities. We’ve essentially been talking about deferred annuities thus far—i.e., annuities where payments do not begin until a specified date, sometime in the future. Immediate annuities are also available, and offer an immediate income stream. There are pros and cons here, and it is important to make this important decision in consultation with a financial advisor. (Immediate income surely sounds nice—but is it the best way to grow your investment?)
5.Yes, annuities enjoy tax-deferred treatment on income gains. With that said, many other retirement investments offer the same basic benefit, which leads some advisors to determine that using annuities within a retirement portfolio is redundant.
Annuities bring many possible benefits, but also some big questions. The first step in annuity investment should be a discussion with your financial advisor. Call Stonepath Wealth Management today to schedule a consultation.
Disclaimer: A Fixed Annuity is a long-term financial product designed largely for asset accumulation and retirement needs. Fixed Annuities generally contain fees and charges which include, but are not limited to, surrender charges, administrative fees and for optional contract riders and benefits. Withdrawals and death benefits are subject to income tax. If withdrawals and other distributions are received prior to age 59 1/2, a 10% penalty may apply. Fixed Annuities typically carry surrender charges for several years that may be assessed against withdrawals. Certain Fixed Annuity product features, offered by some Fixed Annuity companies, such as stepped-up death benefit, a bonus credit and a guaranteed minimum income benefit, carry added fees. If you are investing in a Fixed Annuity through a tax-advantaged plan such as an IRA, you will get no added tax advantage. Under these circumstances you should only consider buying a Fixed Annuity if it makes sense because of the Fixed Annuities other features, such as lifetime income payments and death benefit protection. All guarantees of a Fixed Annuity are backed by the claims paying ability of the issuing insurer.